In this guide, Keith Egan, the Managing Director of Magnate Assets, offers insights on recognising and optimising yield for the best returns in property investment.
Egan emphasises the significance of a property's yield for landlords. The rental yield represents the return your property investment generates and is a metric to gauge its performance over time. It allows for comparing buy-to-let properties, market averages, and other financial assets.
Egan explains that property investments in different regions of the UK exhibit varying characteristics. In more expensive areas like London and the South of England, rental yields tend to be lower, but properties tend to appreciate. Conversely, more affordable locations like the Midlands and North of England offer higher yields but may experience a different level of capital growth. This trade-off is essential, as landlords aiming for long-term capital gains may prioritise appreciation over yield, while those reliant on monthly rental income find yield figures more pertinent.
How Have Yields Evolved Recently?
Egan delves into the evolution of yields in recent years. He notes that during the early stages of the pandemic and up until the middle of the following year, both average house prices and rents were on the rise. As a result, gross yields remained relatively stable. The Paragon Banking Group data reveals that in Q4 of 2020, the average gross yield in England stood at 5.8%, with variations from 5.1% in Central London to 6.4% in Yorkshire & Humber and the East Midlands. In Q3 of 2022, nearly two years later, there was minimal change, with England's average yield remaining at 5.8%, ranging from 5% in Outer London to 6.3% in the North East and Yorkshire & Humber.
Egan also highlights findings from Rightmove's rental price tracker for the second quarter of the current year, which indicated variations in average yields across the UK. These ranged from 5.3% in London to 8.3% in the North East of England. All regions, including Scotland and Wales, showed slight increases compared to the previous year.
However, Egan points out that landlords with mortgages might see a decline in their net yield due to rising mortgage interest rates. These rates have increased significantly since the Bank of England base rate started to climb in August of the previous year. In July, a typical 2-year fixed deal carried a 6.66% interest rate, according to Moneyfacts, nearly triple the rate from the end of 2020. Consequently, monthly mortgage payments for some landlords may have nearly tripled as well, potentially eroding their profits. In some cases, landlords may need to subsidise their investments if they cannot increase rent or reduce other costs.
Egan stresses that despite rising annual costs, properties have performed well in capital growth. He anticipates that as interest rates are expected to decrease, mortgage costs will likely follow suit.
The Importance of Planning Ahead
Egan underscores the importance of planning and financial stress-testing when making buy-to-let investments or responding to significant changes like mortgage rate fluctuations. Landlords should always be aware of their break-even point and continually monitor income and expenditure to anticipate financial challenges and take proactive measures to mitigate them.
Strategies to Increase Yield
In summary, Egan offers several strategies to boost yield:
Topics:UK Property, Off-Plan Property, Real Estate Market, Rents, Regulations, Investment Strategies, Overseas Investors, Short Term Lets, Yield
Topics:UK Property, Real Estate Market, Market Trends, Regulations, Investment Strategies, Overseas Investors, Buy to Let